CCRI is a flagship initiative of COP26 which has developed a framework that allows the integration of physical climate risks into all investment decisions
As part of the CCRI’s asset design and structuring workstream, PCRAM has been developed under the guidance of Mott MacDonald
Integrating physical climate change risks into asset planning and development is crucial if we are to embed climate resilience in our infrastructure to protect the communities which depend on it
With climate change impacts becoming more frequent and severe, the global infrastructure asset base is becoming increasingly exposed to risk – with potentially devastating consequences for the world’s most vulnerable communities. Yet, around the world, physical climate risks are not consistently quantified and mitigated, with investors worried that funding will not be available to improve the resilience of their infrastructure.
The Coalition for Climate Resilient Investment (CCRI) aims to change this by developing a framework that allows the integration of physical climate risks into all investment decisions. CCRI is a flagship initiative of COP26 and a public-private sector endeavour led by insurer Willis Towers Watson. The coalition has the support of the UK, Australian, Jamaican and other governments as well as investors, insurers, consultants, engineering and construction firms, local governments, think tanks and academic institutions with membership across 120 organisations representing US$20trn in assets.
CCRI’s work is split into three workstreams. The first focuses on systemic resilience, to help governments assess and manage physical climate risks in national decision making and prioritise investments based on the exposure of economic and social value. The second workstream focuses on asset design and structuring, to help integrate physical climate risks into the investment appraisal process. Finally, a workstream on financial innovation is developing new instruments to promote investment and unlock funding and financing in climate resilience.
CCRI has just published a paper entitled ‘Risk and resilience: addressing physical climate risks in infrastructure investment’, which presents an overview of a methodology that accounts for physical climate impacts, quantifies climate risks, and allows organisations to address them by improving the resilience of infrastructure assets. The document makes the wider case for investment in climate resilience and highlights the issues that need to be addressed to meet the adaptation and resilience challenge in the infrastructure sector.
As part of the CCRI’s asset design and structuring workstream, a Physical Climate Risk Assessment Methodology (PCRAM) has been developed under the guidance of Mott MacDonald. The methodology will be incorporated into a guidance document, which will be widely shared to help asset owning organisations evaluate and integrate the cost-benefit implications of physical climate risks into infrastructure planning, design, appraisal and ongoing operations and management.
Developing this methodology has involved working collaboratively with a variety of stakeholders across the infrastructure industry as well as asset owners, financial institutions, investors, lenders and climate data scientists.
This industry collaboration has examined a diverse set of infrastructure case studies from around the world. These allowed for the PCRAM to be refined to quantify the difference between each project’s business-as-usual projections and adaptation scenarios, taking account of the asset, climate and cost data. In the first three case studies we observed improved medium-term cashflow projections using our methodology, strengthening the business case for resilience investment.
This work will lead to consolidated guidelines showing how the link between climate trends and asset design can be built into investment decision making, which will be released as ‘Guidelines to incorporating physical climate risks into infrastructure investment’ shortly after COP26.
PCRAM builds on asset management, engineering, financial analysis and climate resilience good practice to create a methodology that is recognisable to each of those professions.
It takes a bottom-up, component-based risk assessment approach that links climate projections, engineering and asset management with infrastructure financial models. The methodology can be applied to any physical asset or portfolio of assets, for any set of climate hazards. It is designed to enable owners and investors alike to develop their level of maturity in managing climate risks over time. The methodology recognises that climate science is improving all the time, while localised climate impacts and the use and condition of assets can change over time.
The PCRAM consists of four steps, with three gateway check:
A successful PCRAM assessment relies on collaboration between asset owners and operators, climate data scientists, climate resilience experts, engineers and asset managers as well the investment industry. It enables owners and investors to plan for a resilient future and identify opportunities to improve business outcomes while doing so.
You only have to watch the news to see how devastating extreme weather events can be, from last year’s forest fires in Australia to the largescale flooding we saw in Europe. As well as the terrible human and environmental impact these events had, there were also huge economic losses. And these impacts are set to become even more severe, as the impact of past and present greenhouse gas emissions will continue to drive climate change for decades to come – ramping up pressure on the global asset base.
Infrastructure owners and operators have an increasingly good understanding of their role in decarbonisation to limit global temperature increases – and many have plans in place to drive down their carbon emissions. However, the importance of climate change adaptation and resilience is less understood. Most asset owners do not integrate physical climate change risks into asset planning and development, which is crucial if we are to embed climate resilience in our infrastructure to protect the communities which depend on it. Without identifying and quantifying such risks over the long term, there is also a potential value dislocation in infrastructure assets which could have very significant implications for the financial industry, governments and ultimately the users of such assets.
Adaptation and resilience to climate change have always been critical to the most vulnerable communities, and physical climate risks have more recently been recognised as one of the top risks for our infrastructure and the global economy. As such, adaptation and resilience as well as the financing of adaptation and resilience are top of the agenda for COP26 in Glasgow alongside efforts to meet our global emissions goals. The message is clear: we must build and invest in resilience at the same time as decarbonising our economies.